MidTest Financial Management EM-10A: Questions & Answers Page 1

Orange Computer Inc., and Maroon Technology Corp., are public companies operating in the same
industry. They design, manufacture and market mobile communication and media devices, personal
computers, and portable digital music players, and sells a variety of related software, services, peripherals,
networking solutions, and third-party digital content and applications.
As companies engaged in the same industry, they often compete to win in the same tender for large-
scale technology projects. Both companies common stocks, Orange Computer Inc., (ticker symbol: ORCO)
and Maroon Technology Corp. (ticker symbol: MATC), are sold at the New World Stock Exchange (NWSE),
the biggest stock exchange in the country of Majapahit.
For any kind of companies operating in the country of Majapahit, the government imposes an equal
40% tax rate for all companies. In addition, to finance the construction of its outer ring road, the
government issues a 10-year bonds that have a yield of 7.5%. Majapahit government guarantees that
whatever happens with the economic conditions, the country will never fail to pay its long-term debt
obligations.
Although both companies have similar products to sale on the marketplace, each company has
different sources of funds and capital structures, so the costs of capital of the two are not the same.
Tables 1 6 provide all the information you need to calculate the costs of capital of both companies.
Use the information from these tables to answer PROBLEMS 1 2.










MidTest Financial Management EM-10A: Questions & Answers Page 2






PROBLEM 1 (30 points)
Topic: Cost of Capital

a) Calculate the beta for Orange Computer, Inc.! (5 points)
b) Calculate the beta for Maroon Technology Corp.! (5 points)
c) Calculate the cost of equity using Capital Asset Pricing Model (CAPM) for Orange Computer, Inc.! (5
points)
d) Calculate the cost of equity using Capital Asset Pricing Model (CAPM) for Maroon Technology Corp.! (5
points)
e) Calculate the weighted average cost of capital (wacc) for Orange Computer, Inc.! (5 points)
f) Calculate the weighted average cost of capital (wacc) for Maroon Technology Corp.! (5 points)

Answer:

a) Beta for Orange Computer, Inc.:
= Covariance of Return
ORCO,NWSE
/ Variance of Return
NWSE

= 0.003116667 / 0.006762500
= 0.461
b) Beta for Maroon Technology Corp.:
= Covariance of Return
MATC,NWSE
/ Variance of Return
NWSE

= 0.010336111 / 0.006762500
= 1.528
c) COE for Orange Computer, Inc.:
= rf + beta
ORCO
(Rm rf)
= 0.075 + 0.461(0.1750 0.075)
= 0.1211 = 12.11%
MidTest Financial Management EM-10A: Questions & Answers Page 3

d) COE for Maroon Technology Corp.:
= rf + beta
MATC
(Rm rf)
= 0.075 + 1.528(0.1750 0.075)
= 0.2278 = 22.78%
e) WACC for Orange Computer, Inc.:
= w
D
cod + w
PS
cps + w
E
coe
= (75/375)(0.08 x 0.6) + (75/375)(0.10) + (225/375)(0.1211)
= 0.0096 + 0.02 + 0.0727
= 0.1023 = 10.23%
f) WACC for Maroon Technology Corp.:
= w
D
cod + w
E
coe
= (200/1,000)(0.15 x 0.6) + (800/1,000)(0.2278)
= 0.018 + 0.1822
= 0.1822 = 18.22%


PROBLEM 2 (25 points)
Topic: Capital Budgeting

The government of Majapahit held a tender for the procurement of cloud computing services project. The
duration of the project is 10 years, whereas the winning bidder is required to invest a certain amount of
money in the beginning and the next two years of the project. Then, starting at the third year and thereafter
until the tenth year, the winning bidder will get an annual fixed amount of cloud computing services fees
from Majapahit government.
The projected after-tax cash flows of this cloud computing services project are shown at Figure 1 below:



Tables 7 & 8 provide selected Time Value of Money Table used to calculate the Net Present Value (NPV) of
this project.

















MidTest Financial Management EM-10A: Questions & Answers Page 4





Using the selected Time Value of Money Table at Tables 7 & 8 above, answer the following questions:

a) What is the NPV of the project for Orange Computer, Inc.? (10 points)
b) What is the NPV of the project for Maroon Technology, Corp.? (10 points)
c) Will both companies submit proposals for this project? Why or why not? Explain your answer briefly!
(5 points)

Answer:
a) Present value di tahun kedua dari cash inflow 7,000,000 tahun ketiga sampai tahun kesepuluh:
= 7,000,000 x PVIFA
10.23%,8years

= 7,000,000 x 5.290458
= 37,033,206
NPV = 10,000,000 + (10,000,000 x PVIFA
10.23%,2years
) + (37,033,206 x PVIFA
10.23%,2years
)
= 10,000,000 + (10,000,000 x 1.730195) + (37,033,206 x 0.823001)
= 27,301,950 + 30,478,366
= 3,176,416
MidTest Financial Management EM-10A: Questions & Answers Page 5


b) Present value di tahun kedua dari cash inflow 7,000,000 tahun ketiga sampai tahun kesepuluh:
= 7,000,000 x PVIFA
18.22%,8years

= 7,000,000 x 4.0499927
= 28,349,949
NPV = 10,000,000 + (10,000,000 x PVIFA
18.22%,2years
) + (28,349,949 x PVIFA
18.22%,2years
)
= 10,000,000 + (10,000,000 x 1.561394) + (28,349,949 x 0.715514)
= 25,613,940 + 20,284,785
= 5,329,155.

c) No, only ORCO will submit the proposal for the cloud computing project because it is an acceptable
positive NPV project. MATC wont submit the proposal because for MATC, it is a negative NPV project .


PROBLEM 3 (18 points)
Topic: Time Value of Money
Use Tables 9 or 10 to answer Problems 3a) and 3b).



MidTest Financial Management EM-10A: Questions & Answers Page 6




a) An individual borrows $200,000 to buy a house with a 20-year mortgage requiring payments to be made at the
end of each month. The annual interest rate is 12%, compounded monthly. What is the monthly mortgage
payment? (9 points)

Answer:
PV = 200,000; N = 20 12 = 240; I/Y = 12/12 = 1;FV = 0; CPT PMT = $2,202.17.

Using Table 10
PV = ANN x PVIFA
1%,240months

ANN = PV/ PVIFA
1%,240months

= 200,000 / 90.81942 = 2,202.17

b) You want to retire 20 years from now. At the end of retirement, you want to have a pension fund of 20 million
dollars. You want to achieve this target by saving an equal amount of money every month. At a 12% annual
interest rate, how much money should you save every month? (9 points)

Answer:
FV = 20,000,000; N = 20 12 = 240; I/Y = 12/12 = 1; PV = 0; CPT PMT = $20,217.23

FVA = ANN x FVIFA
1%,240months

ANN = FVA / FVIFA
1%,240months

= 20,000,000 / 989.255
= 20,217.23













MidTest Financial Management EM-10A: Questions & Answers Page 7

PROBLEM 4 (27 points)
Topic: Loan Payment and Amortization
Use Table 11 to answer Problem 4.



Assume today is 01 January 2014. Sarah Jessica Parker is buying a new $500,000 car. Right now, she only have $200,000
in cash, so she needs a car-loan to pay for the rest. She takes a 4-year car loan with a 6% annual interest rate.
a) How much should Sarah pay every year if the due date of this loan is on every 31 December? (8 points)
b) Complete Table 12 below to construct an amortization schedule of Sarahs car-loan payments! (14 points)




c) After getting a huge amount of fee for her main role in a new box-office movie in 2015, Sarah already have
enough money so she decides to pay all her debt on 2 January 2016. Assuming there is no penalty for
prepayment and ignoring the 2 days interest rate, how much should she pay to settle her car-loan? (5 points)


Answer:

a) How much should Sarah pay every year if the due date of this loan is on every 31 December?
PV = 300,000; N = 4; I/Y = 6; FV = 0; CPT PMT = $86,577.448

PV = ANN x PVIFA
6%,4years

ANN = PV/ PVIFA
6%,4years

= 300,000 / 3.465106 =86,577.438







MidTest Financial Management EM-10A: Questions & Answers Page 8

b)





c) On 2 January 2016, she only has to pay $158,730.478